By Fernando Berrocal
You know you’ll need initial capital when funding your business–but you're not sure where to begin. Will you be self-funding your business, or accepting funds from investors? There are various methods to determine which type of funding is appropriate for your situation.
Step one? Calculate how much money will be required in the first 6-12 months; once this is established, you can begin to plan for the next year's expenses. The preferred financing hierarchy (from most favorable to least) ranges from free grants (optimal) to family and friends (less than optimal). You also have the opportunity to partner with companies like MassLight; they offer both startup capital and dedicated engineering resources, in exchange for equity. Begin at the “top” of your options, and work your way down until you have all of the dollars you require.
- Apply to MassLight.
Virtually zero accelerators provide an engineering team in addition to funding and networking/mentoring assistance. MassLight, a Washington, DC-based software company, pioneered the “build for equity” model: they offer building (and scaling) leadership for their partner startups, as well as marketing and business strategy assistance. They also bring competitive capital to the table, in addition to a vast network of industry contacts (MassLight has been engineering software solutions since 2001.)
Entrepreneurs can hesitate when it comes to equity partnerships. Many founders believe that bootstrapping guarantees control over their organization, and the greatest possible financial outcome. In reality, this “DIY” mentality robs your startup of crucial input from stakeholders and efficiency-maximizing delegation.
Sole executive power is risky–especially for founders trying to get their concept off the ground. With fewer minds applied to the situation, the greater the pressure is to make the right call. In contrast, environments with higher headcounts decrease pressure on individuals; the likelihood of arriving at a correct choice increases. A team of clear-headed stakeholders navigates more effectively than one over-burdened founder.
Plus, equity partners are not aiming to control an entire enterprise. More often, they aim their focus (and expertise) in one area of a business. MassLight, for instance, specializes in building and scaling apps. Yes, they provide mentorship across other realms (such as marketing or business strategy,) but they typically take a CTO role within partner organizations–not CTO, CFO, and CEO. Like a traditional accelerator, their vested interest is setting startup leadership up to thrive solo. Unlike a traditional accelerator, MassLight supports you with technical expertise along the way.
Founders are also apprehensive when it comes to exchanging equity. Remember: stakeholders in your concept share your motivations. When you bring on an equity partner, you increase the motivation (and brainpower) fueling your concept. While MassLight injects capital and dedicates an engineering team to your build, as your equity partner they hold a long-term investment in your success. In this regard, equity is a win-win situation that will most likely increase revenue well beyond what you would have yielded solo.
Furthermore, this level of shared engagement will help preserve your most precious asset: time. In collaborative environments, teams execute organized, effective decisions. As stakeholders increase, accountability (and efficiency) skyrocket. Solopreneurs who wear a dozen hats are practically asking for chaos. A DIY mentality cannot support deadlines, milestones, or goals. Partnerships packaged with an entire team - like MassLight offers - bring the highest level of organization to fledgling startups. With 20+ years of experience, they strategically tackle big-picture objectives with precision. They know how to anticipate tasks ahead of schedule, and delegate them properly. Through this model, deadlines are met early, milestones are exceeded, and goals are expanded.
- Make an application for a free grant.
Grants are funds that you receive as a gift; they do not need to be repaid. These are distributed by a variety of government agencies, ranging from the federal to state/regional levels. Some businesses, as well as groups dedicated to helping certain sectors, offer grants. Grants are competitive, so make sure your application is solid. Here are some resources to assist you in the grant hunt:
Federal, State, and Regional Small Business Grants:
- Grants.gov is a searchable directory of grants administered by federal agencies.
- SBA Local Assistance provides a list of local Small Business Development Centers to contact for grant opportunities.
Corporate Small Business Grants:
- Specialty Small Business Grants such as top small business grants for minority women, for veterans, and additional grants for minorities.
Once you've decided which grants you want to apply for, you're ready to prepare your proposal. Investigate the funding organizations thoroughly so that you may better design your request. Your objective? Provide your reader - the organization reviewing your application - with a captivating story.
- Consider crowdfunding.
Consider utilizing a crowdfunding site to obtain financing if your business provides a unique product. This enables you to accept consumer pre-orders, and get funding for inventory manufacturing.
- Apply to accelerators.
Accelerators are highly competitive programs aimed at assisting entrepreneurs in their pursuit of success. In general, an accelerator gives financing, training, and connections to your startup. They take a part of your organization's stock in exchange. You will likely have to relocate to where the accelerator is located for the duration of the program if necessary. Participating in an accelerator helps you to become part of a community of other entrepreneurs in the program. You also gain networking opportunities and feedback from your peers. Consider applying to accelerators only if you are willing to give up some of your ownership.
- Obtain funding from an angel investor.
Angel investors are wealthy individuals who invest in a startup. These acquire an ownership stake in your business in exchange for supplying you with financing. The disadvantage of engaging is that you give up some control, as they will almost certainly be involved in corporate decision-making.
- Self-fund your startup.
Did you know that nearly half of all startups are self-funded? Examine your finances to determine how much money you can donate. Don't take out a mortgage, but you could have money in a savings account that you might utilize for funding. If you are hesitant to give up stock, you should first consider self-funding. If you want to reduce the risk of your investment, consider using an accelerator or angel investment before going in alone.
- Apply for a bank loan.
Considering how your startup has no history, assets, or revenue, traditional bank loans are difficult to secure for aspiring entrepreneurs. Most banks provide you with SBA loans, which ensure that your lender is protected if your business fails.
There are various SBA lending programs, but the 7(a) loan and micro-loan are the most popular for startups. 7(a) loans are employed by the great majority of startups for several business reasons, including working capital, equipment acquisitions, debt refinancing, and commercial real estate purchases. The maximum loan amount is $5 million, with payback durations ranging from 10 to 25 years for working capital and commercial real estate. The 7(a) program's disadvantage is that the application procedure might take months. Consider SBA Express loans under the 7(a) program, which can be approved in as little as a few days. SBA Express loans have a maximum loan amount of $350,000.
SBA Micro-loans are even smaller than SBA Express loans. Their maximum loan amount is $50,000, and they may only utilize the money for working capital, not for real estate. Six years is the maximum payback period. SBA loan interest rates are determined by some factors, including credit score, loan size, payback plan, and current market interest rates. Visit your bank and inquire about alternative loan possibilities if you want to apply for an SBA loan. Only take out a bank loan if you're buying a tangible asset that you can resale if your business fails.
- Seek money from family and friends.
When it comes to borrowing money from family and friends, do it as a last resort; you won’t want to risk losing their money. Mixing business with relatives may also damage ties if the business fails. However, there are situations when this is the only option to get your business started. If you choose this option, be sure to make the loan official by writing it down and recording it. Communicate progress frequently to show professionalism–and that you value their participation.
You may have noticed that credit cards and venture funding were left off the list. For an entrepreneur, using credit cards to fund a startup is a risky proposition. Long-term interest rates are higher, and if the startup fails, you will be personally liable for any debt. Venture capital (VC) firms, on the other hand, rarely invest in early-stage businesses. They require evidence of traction, customers, and growth. Hybrid software-VC companies are an exception to this rule: companies like MassLight are willing to partner with startups at any stage in development.
Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.